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Midwest aluminum premiums hold steady

Keywords: Tags  Midwest premium, P1020, LME, warehouse, scrap, contango, backwardation, aluminum nonferrous

CHICAGO — Midwest aluminum spot premiums held their ground this past week as warehousing deals and a tighter aluminum scrap market bolstered tags despite continued concerns about end-use demand in some markets.

AMM’s Midwest premium remained unchanged at between 11.5 and 12 cents per pound, with most transactions continuing to be reported within that range.

Helping to keep a floor under premiums is the fact that some consumers are substituting primary aluminum for hard-to-secure scrap grades, sources said.

"Some consumers prefer buying prime because scrap is very tight and yards have been low on scrap units," one trader said. "I don’t see premiums tailing off. I think buyers are getting ready to reload."

A second trader confirmed the trend, noting that switching from scrap to prime has been especially pronounced at some domestic sheet mills.

Another factor bolstering premiums is the disappearance of a brief backwardation on the London Metal Exchange that had some market participants concerned about the viability of warehouse financing deals that are profitable only when LME prices are in contango.

"The back is gone, so the (warehousing) deals are going to be there," a third trader said.

But while tight scrap supply and continued financing deals might be keeping premiums firm, that strength has been offset by a lack of demand in some sectors, sources said.

Most market sources characterized spot activity over the past week as slow, and while some market participants touted the strength of such sectors as transportation, others fretted about the fragility of the U.S. economic recovery, noting some slower-than-expected demand from service center and construction-related customers in particular.

Still others argued that a sluggish spot market was actually a sign of an improving economy as more customers are looking to lock into long-term "min-max" contracts. Under those contracts, customers have generally been able to meet their metal requirements and have not had to turn to the spot market, they said.

"After the (economic crisis), no one was expecting demand to come back quickly, so customers bought hand-to-mouth," boosting spot activity, one producer source said. "Now they are not doing that because business is better." He said he expected spot activity to remain tepid in the coming months as a result of more buyers relying on long-term contracts instead of spot deals.

Sources said buying activity has also slowed compared to previous weeks, when a steep drop in LME prices sparked buying as customers looked to lock in attractive prices.

The LME’s cash aluminum contract reached a recent low of $1,833.50 per tonne on April 4, 13.6 percent below a 2013 high of $2,123 per tonne recorded on Feb. 15. Prices have rallied slightly over the past week, with the cash aluminum contract ending the official session on April 12 at $1,841 per tonne, although that is still down nearly 2 percent from $1,878 per tonne as recently as April 9.

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